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Exhibit 4.1




Amendment No. 2 to Rights Agreement




 









 





EXHIBIT A




AMENDMENT NO. 2

TO

RIGHTS AGREEMENT




     This
Amendment No. 2 dated as of July 8, 2004 (“Amendment”) to the Rights
Agreement dated as of December 14, 1999, as heretofore amended (the “Rights
Agreement”), by and between Digital Recorders, Inc., a North Carolina
corporation (the “Company”), and Continental Stock Transfer & Trust Company, a
New York corporation (the “Rights Agent”), is by and between the Company and
the Rights Agent.



Recitals




     WHEREAS, the Company and the Rights Agent previously have entered into the
Rights Agreement;



     WHEREAS, pursuant to Section 27 of the Rights Agreement, the Company may
from time to time (and the Rights Agent shall, if the Company so directs)
supplement or amend any provision of the Rights Agreement without the approval
of any holders of Right Certificates; provided that from and after such time as
any Person becomes an Acquiring Person, the Rights Agreement may not be amended
or supplemented in any manner which would adversely affect the interests of the
holders of Rights (other than an Acquiring Person and its Affiliates and
Associates);



     WHEREAS, no Person has become an Acquiring Person as of the date hereof;



     WHEREAS, the Board of Directors of the Company has determined that it is
in the best interests of the Company and its shareholders to amend the Rights
Agreement as set forth herein, and thereby to cause the Rights Agreement to
terminate on the date contemplated by Section 1 hereof, and has duly approved
this Amendment and authorized its execution and delivery; and



     WHEREAS, the Company has directed the Rights Agent to enter into this
Amendment and has provided to the Rights Agent an officer’s certificate and
such other information as the Rights Agent may have requested sufficient to
permit the Rights Agent to determine that its execution and delivery hereof is
in compliance with the terms of Section 27 and otherwise appropriate under the
terms of the Rights Agreement;



     NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto agree as follows:



     1. Amendment to Section 1(m). Paragraph (m) of Section 1 of the Rights
Agreement is hereby amended by deleting such paragraph (m) in its entirety from
Section 1 and replacing it with the following new paragraph:



           (m) “Final Expiration Date” shall mean July 15, 2004.



     2. Amendment to Exhibit B. Exhibit B to the Rights Agreement is hereby
amended by deleting the existing Exhibit B in its entirety and replacing it
with the new Exhibit B set forth in Appendix 1 hereto, with the revised
language indicated by italics and bold.



     3. Amendment to Exhibit C. Exhibit C to the Rights Agreement is hereby
amended by deleting the existing Exhibit C in its entirety and replacing it
with the new Exhibit C set forth in Appendix 2 hereto, with the revised
language indicated by italics and bold.



 









 





     4. Defined Terms. Capitalized terms that are used herein and not
otherwise defined shall have the meanings assigned to them in the Rights
Agreement.



     5. No Further Amendment. All other terms and provisions of the Rights
Agreement not expressly modified by this Amendment shall remain in full force
and effect during the term of the Rights Agreement (as amended hereby) and are
hereby expressly ratified and confirmed.



[Remainder of Page Intentionally Blank]




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     IN WITNESS WHEREOF, the parties hereto have executed or have caused this
Amendment to be executed on the date set forth above.



	 	 	 
	

	 	COMPANY:
	 
	 	 
	

	 	DIGITAL RECORDERS, INC.,

a North Carolina corporation
	 
	 	 
	

	 	By: /s/ DAVID L.
TURNEY

	

	 	       David L. Turney

       Chairman, Chief Executive Officer and

       President
	 
	 	 
	

	 	RIGHTS AGENT:
	 
	 	 
	

	 	CONTINENTAL STOCK TRANSFER & TRUST

COMPANY, a New York corporation
	 
	 	 
	

	 	By: /s/ WILLIAM F. SEEGRABER

	

	 	       William F. Seegraber

       Vice President







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Appendix 1




EXHIBIT B

[Form of Right Certificate]




Certificate No. R-                                                                       
                                        
_______ Rights




NOT
EXERCISABLE AFTER JULY 15, 2004 OR EARLIER IF REDEMPTION OR EXCHANGE
OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $0.001 PER RIGHT AND TO
EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES, RIGHTS THAT ARE OR WERE ACQUIRED OR BENEFICIALLY OWNED BY AN
ACQUIRING PERSON OR ANY ASSOCIATES OR AFFILIATES THEREOF (AS SUCH TERMS ARE
DEFINED IN THE RIGHTS AGREEMENT) OR ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY
BECOME NULL AND VOID.



Right Certificate




DIGITAL RECORDERS, INC.




This certifies that                                       , or registered assigns, is the
registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of December 14, 1999, as amended (the “Rights
Agreement”), between Digital Recorders, Inc., a North Carolina corporation (the
“Company”), and Continental Stock Transfer & Trust Company (the “Rights
Agent”), to purchase from the Company at any time after the Distribution Date
(as such term is defined in the Rights Agreement) and prior to 5:00 P.M., New
York, New York, on July 15, 2004, at the office of the Rights Agent, or at the
office of its successor as Rights Agent, one one-thousandth of a fully paid
non-assessable share of Series D Junior Participating Preferred Stock, par
value $.10 per share (the “Preferred Shares”), of the Company, at a purchase
price of $20.00 per one one-thousandth of a Preferred Share (the “Purchase
Price”), upon presentation and surrender of this Right Certificate with the
certification and the Form of Election to Purchase duly executed. The number of
Rights evidenced by this Right Certificate (and the number of one
one-thousandths of a Preferred Share which may be purchased upon exercise
hereof) set forth above, and the Purchase Price set forth above, are the number
and Purchase Price as of December 27, 1999, based on the Preferred Shares as
constituted at such date. As provided in the Rights Agreement, the Purchase
Price and the number of one one-thousandths of a Preferred Share which may be
purchased upon the exercise of the Rights evidenced by this Right Certificate
are subject to modification and adjustment upon the happening of certain
events.



     From and after the occurrence of an event described in Section 11(a)(ii)
of the Rights Agreement, if the Rights evidenced by this Right Certificate are
or were at any time on or after the earlier of (x) the date of such event and
(y) the Distribution Date (as such term is defined in the Rights Agreement)
acquired or beneficially owned by an Acquiring Person or an Associate or
Affiliate of an Acquiring Person (as such terms are defined in the Rights
Agreement), such Rights shall become void, and any holder of such Rights shall
thereafter have no right to exercise such Rights.



     This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates. Copies of
the Rights Agreement are on file at the principal executive offices of the
Company and the office of the Rights Agent.



     This Right Certificate, with or without other Right Certificates, upon
surrender at the office of the Rights Agent, may be exchanged for another Right
Certificate or Right Certificates of like tenor and date evidencing Rights
entitling the holder to purchase a like aggregate number of Preferred Shares as
the



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Rights evidenced by the Right Certificate or Right Certificates
surrendered shall have entitled such holder to purchase. If this Right
Certificate shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Right Certificate or Right Certificates for the
number of whole Rights not exercised.




     Subject to the provisions of the Rights Agreement, at the Company’s
option, the Rights evidenced by this Certificate (i) may be redeemed by the
Company at a redemption price of $0.001 per Right or (ii) may be exchanged in
whole or in part for shares of the Company’s Common Stock, par value $.10 per
share, or Preferred Shares.



     No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-thousandth of a Preferred Share, which may, at the
election of the Company, be evidenced by depositary receipts), but in lieu
thereof a cash payment will be made, as provided in the Rights Agreement.



     No holder of this Right Certificate shall be entitled to vote or receive
dividends or be deemed for any purpose the holder of the Preferred Shares or of
any other securities of the Company which may at any time be issuable on the
exercise hereof, nor shall anything contained in the Rights Agreement or herein
be construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof, or to give
or withhold consent to any corporate action, or to receive notice of meetings
or other actions affecting stockholders (except as provided in the Rights
Agreement), or to receive dividends or subscription rights, or otherwise, until
the Right or Rights evidenced by this Right Certificate shall have been
exercised as provided in the Rights Agreement.



     This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.



WITNESS the facsimile signature of the proper officers of the Company and its
corporate seal.
Dated:



	 	 	 
	

	 	DIGITAL RECORDERS, INC.
	 
	 	 
	

	 	By:                                                          







Countersigned:




CONTINENTAL STOCK TRANSFER & TRUST COMPANY




By:                                                          




     Authorized Officer




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[Form of Reverse Side of Right Certificate]




FORM OF ASSIGNMENT

(To be executed by the registered holder if such holder desires to transfer the Right Certificate.)




     FOR VALUE RECEIVED                                                           hereby sells, assigns
and transfers unto                                      
                                      


(Please print name and address of transferee)




this Right Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint                    
Attorney, to transfer the within Right
Certificate on the books of the within-named Company, with full power of
substitution.



	 	 	 
	Dated:                                                           ,                    

	 	                                                              

Signature







Signature Guaranteed:                                                                             

The undersigned hereby certifies that the Rights evidenced by this Right
Certificate are not beneficially owned by an Acquiring Person or an Affiliate
or Associate thereof (as defined in the Rights Agreement).




	 	 	 
	

	 	                                                                        

Signature







FORM OF ELECTION TO PURCHASE

(To be executed if holder desires to exercise the Right Certificate.)




To Digital Recorders, Inc.:

The undersigned hereby irrevocably elects to exercise                                        Rights
represented by this Right Certificate to purchase the Preferred Shares issuable
upon the exercise of such Rights and requests that certificates for such
Preferred Shares be issued in the name of:



                                                                                               

(Please print name and address and insert social security or other
identifying number)




If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:



                                                                                               

(Please print name and address and insert social security or other identifying
number)




	 	 	 
	Dated:                                                           ,                    

	 	                                                                      

Signature







Signature Guaranteed:

                                                                                                                 




The undersigned hereby certifies that the Rights evidenced by this Right
Certificate are not beneficially owned by an Acquiring Person or an Affiliate
or Associate thereof (as defined in the Rights Agreement).



	 	 	 
	

	 	                                                                         

Signature







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[Form of Reverse Side of Right Certificate continued]




NOTICE




     The signature(s) on the foregoing Assignment must correspond to the
name(s) as written upon the face of this Warrant in every particular, without
alteration or enlargement or any change whatsoever. The signature(s) must be
guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings
and Loan Associations and Credit Unions with membership in an approved
signature guarantee Medallion Program).



     In the event the certification set forth above in the Form of Assignment
or the Form of Election to Purchase, as the case may be, is not completed, the
Company and the Rights Agent will deem the beneficial owner of the Rights
evidenced by this Right Certificate to be an Acquiring Person or an Affiliate
or Associate thereof (as defined in the Rights Agreement) and such Assignment
or Election to Purchase will not be honored.



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Appendix 2




EXHIBIT C

SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES




     On December 13, 1999, the Board of Directors of Digital Recorders, Inc.
(the “Company”) declared a dividend of one preferred share purchase right (a
“Right”) for each outstanding share of common stock, par value $.10 per share
(the “Common Shares”) outstanding on December 27, 1999 (the “Record Date”) to
the stockholders of record on that date. Each Right entitles the registered
holder to purchase from the Company one one-thousandth of a share of Series D
Junior Participating Preferred Stock, par value $.10 per share (the “Preferred
Shares”), of the Company, at a price of $20.00 per one one-thousandth of a
Preferred Share (the “Purchase Price”), subject to adjustment. The description
and terms of the Rights are set forth in a Rights Agreement,
as amended (the
“Rights Agreement”), between the Company and Continental Stock Transfer & Trust
Company, as Rights Agents (the “Rights Agent”). Until the earlier to occur of
(i) 10 days following a public announcement that a person or group of
affiliated or associated persons (an “Acquiring Person”) has acquired
beneficial ownership of 15% or more of the outstanding Common Shares or (ii) 10
business days (or such later date as may be determined by action of the Board
of Directors prior to such time as any Person becomes an Acquiring Person)
following the commencement of, or announcement of an intention to make, a
tender offer or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 15% or more of such outstanding
Common Shares (the earlier of such dates being called the “Distribution Date”),
the Rights will be evidenced, with respect to any of the Common Share
certificates outstanding as of the Record Date, by such Common Share
certificate with a copy of this Summary of Rights attached thereto. The Rights
will be evidenced, with respect to Common Shares outstanding as of the Record
Date that are uncertificated by the registration by the Company or its agent of
the attachment of the Summary of Rights of the holders of such shares as the
registered owner of such Rights and shares together with a copy of this Summary
of Rights attached thereto.



     The Rights Agreement provides that, until the Distribution Date, the
Rights will be transferred with and only with the Common Shares. Until the
Distribution Date (or earlier redemption or expiration of the Rights), new
Common Share certificates issued after the Record Date or upon transfer or new
issuance of Common Shares will contain a notation incorporating the Rights
Agreement by reference. Until the Distribution Date (or earlier redemption or
expiration of the Rights), the Company will send, with respect to Common Shares
that are uncertificated and issued after the Record Date or upon transfer or
new issuance of Common Shares, notice incorporating the Rights Agreement by
reference. Until the Distribution Date (or earlier redemption or expiration of
the Rights), the surrender for transfer of any certificates for Common Shares
or the transfer of any uncertificated shares outstanding as of the Record Date,
even without such notation or a copy of this Summary of Rights being attached
thereto, will also constitute the transfer of the Rights associated with the
Common Shares represented by such certificate or so transferred. As soon as
practicable following the Distribution Date, separate certificates evidencing
the Rights (“Right Certificates”) will be mailed to holders of record of the
Common Shares as of the Close of Business on the Distribution Date and such
separate Right Certificates alone will evidence the Rights.



     The Rights are not exercisable until the Distribution Date. The Rights
will expire on July 15, 2004 (the “Final Expiration Date”), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed by the
Company, in each case, as described below.



     The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the
Preferred Shares, (ii) upon the grant to holders of the Preferred Shares of
certain rights or warrants to subscribe for or purchase Preferred Shares at a
price, or securities convertible into Preferred Shares with a conversion price,
less than the then current market price of the Preferred Shares or (iii) upon
the distribution to holders of the Preferred Shares of evidences of
indebtedness or assets (excluding regular periodic cash



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dividends paid out of earnings or retained earnings or dividends payable
in Preferred Shares) or of subscription rights or warrants (other than those
referred to above).




     The number of outstanding Rights and the number of one one-thousandths of
a Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Shares or a stock
dividend on the Common Shares payable in Common Shares or subdivisions,
consolidations or combinations of the Common Shares occurring, in any such
case, prior to the Distribution Date.



     Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a quarterly dividend
payment of 1000 times the dividend declared per Common Share. In the event of
liquidation, the holders of the Preferred Shares will be entitled to an
aggregate payment of 1000 times the aggregate payment made per Common Share.
Each Preferred Share will have 1000 votes, voting together with the Common
Shares. In the event of any merger, consolidation or other transaction in which
Common Shares are exchanged, each Preferred Share will be entitled to receive
1000 times the amount received per Common Share. These rights are protected by
customary antidilution provisions.



     Because of the nature of the Preferred Shares’ dividend, liquidation and
voting rights, the value of the one one-thousandth interest in a Preferred
Share purchasable upon exercise of each Right should approximate the value of
one Common Share.



     From and after the occurrence of an event described in Section 11(a)(ii)
of the Rights Agreement, if the Rights evidenced by this Right Certificate are
or were at any time on or after the earlier of (x) the date of such event and
(y) the Distribution Date (as such term is defined in the Rights Agreement)
acquired or beneficially owned by an Acquiring Person or an Associate or
Affiliate of an Acquiring Person (as such terms are defined in the Rights
Agreement), such Rights shall become null and void, and any holder of such
Rights shall thereafter have no right to exercise such Rights.



     In the event that, at any time after a Person becomes an Acquiring Person,
the Company is acquired in a merger or other business combination transaction
or 50% or more of its consolidated assets or earning power are sold, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon the exercise thereof at the then current exercise price
of the Right, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times the
exercise price of the Right. Unless the Board acts otherwise, in the event that
any person becomes an Acquiring Person, proper provision shall be made so that
each holder of a Right, other than Rights beneficially owned by the Acquiring
Person and its Affiliates and Associates (which will thereafter be null and
void), will thereafter have the right to receive upon exercise that number of
Common Shares having a market value of two times the exercise price of the
Right. If the Company does not have sufficient Common Shares to satisfy such
obligation to issue Common Shares, or if the Board of Directors so elects, the
Company shall deliver upon payment of the exercise price of a Right an amount
of cash or securities equivalent in value to the Common Shares issuable upon
exercise of a Right; provided that, if the Company fails to meet such
obligation within 30 days following the later of (x) the first occurrence of an
event triggering the right to purchase Common Shares and (y) the date on which
the Company’s right to redeem the Rights expires, the Company must deliver,
upon exercise of a Right but without requiring payment of the exercise price
then in effect, Common Shares (to the extent available) and cash equal in value
to the difference between the value of the Common Shares otherwise issuable
upon the exercise of a Right and the exercise price then in effect. The Board
of Directors may extend the 30-day period described above for up to an
additional 60 days to permit the taking of action that may be necessary to
authorize sufficient additional Common Shares to permit the issuance of Common
Shares upon the exercise in full of the Rights.



     At any time after any Person becomes an Acquiring Person and prior to the
acquisition by any person or group of a majority of the outstanding Common
Shares, the Board of Directors of the Company



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may exchange the Rights (other than Rights owned by such person or group
which have become void), in whole or in part, at an exchange ratio of one
Common Share per Right (subject to adjustment).




     With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will be issued (other than
fractions which are integral multiples of one one-thousandth of a Preferred
Share, which may, at the election of the Company, be evidenced by depositary
receipts) and in lieu thereof, an adjustment in cash will be made based on the
market price of the Preferred Shares on the last trading day prior to the date
of exercise.



     At any time prior to the time any Person becomes an Acquiring Person, the
Board of Directors of the Company may redeem the Rights in whole, but not in
part, at a price of $0.001 per Right (the “Redemption Price”). The redemption
of the Rights may be made effective at such time, on such basis and with such
conditions as the Board of Directors in its sole discretion may establish.
Immediately upon any redemption of the Rights, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.



     The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, except that from and
after such time as any person becomes an Acquiring Person no such amendment may
adversely affect the interests of the holders of the Rights (other than the
Acquiring Person and its Affiliates and Associates).



     Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the
right to vote or to receive dividends.



     A copy of the Agreement has been filed with the Securities and Exchange
Commission as an Exhibit to a Registration Statement on Form 8-A dated December
14, 1999. A copy of the Agreement is available free of charge from the Company.



     This summary description of the Rights does not purport to be complete and
is qualified in its entirety by reference to the Agreement, which is hereby
incorporated herein by reference.




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